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Manila Bulletin devider Business devider BSP mops up P1.56 T excess liquidity

BSP mops up P1.56 T excess liquidity

Published Feb 20, 2023 03:55 pm

The Bangko Sentral ng Pilipinas (BSP) has absorbed P1.56 trillion of excess domestic liquidity as of Feb. 1 this year to control inflation which climbed to its 14-year high in the first month of the year.

The central bank removes money from banks to park these excess money supply with the BSP’s liquidity facilities such as the BSP bills or the securities facility and the term deposit facility (TDF).

The end-January 2023 total outstanding amount absorbed by the BSP is lower compared to same period in 2022 of P2.05 trillion.

However in a monetary policy review, the BSP said the latest P1.56 trillion mopped-up liquidity is 83.1 percent higher than the total pre-pandemic placements of P854 billion as of end-December 2019.

Bank teller counting P1,000 bills/Bloomberg photo

As of Feb. 1 this year, about 38.7 percent or P604.4 billion of absorbed liquidity came from the securities facility. This was the same trend in the same period in 2022 with the market participating more in the BSP bills’ auction every Friday.

About 25.9 percent or P405.3 billion are placements in the TDF, while 19.5 percent or P305 billion are in the overnight reverse repurchase (RRP) facility. Another 15.9 percent or P248.4 billion are in the overnight deposit facility (ODF).

The BSP said the auction results for the TDF and BSP bills during the review period reflected the pass-through of the BSP’s higher policy rate, particularly the 75 basis points (bps) increase implemented on Nov. 17 and the 50 bps hike on Dec. 15.

In particular, the BSP noted that eligible counterparties “have been shifting their assets towards the BSP Securities amid the need to service client requirements.”

At the end of 2022, the BSP rate is at 5.5 percent. Last week, Feb. 16, the Monetary Board again raised the benchmark RRP rate or the overnight borrowing rate by 50 bps, bringing the interest rate from 5.5 percent to six percent.

The BSP in the February 2023 Monetary Policy Report said liquidity in the financial system remain adequate.

In 2022, domestic liquidity was up by 6.4 percent year-on-year to P16.3 trillion.

“Domestic liquidity remains ample and should be able sustain a broadbased economic recovery. M3 (domestic liquidity) is projected to increase in 2023 and 2024, although at a slower rate than the previous round due to higher domestic interest rates following the adjustment in the BSP’s policy rate in Q4 2022,” according to the BSP report.

The BSP also said that credit activity is expected to remain strong as banks have indicated unchanged credit standards for lending. As of end-2022, big banks’ outstanding loans grew by 13.4 percent year-on-year.

Last week, the BSP announced its latest inflation forecast for 2023 of 6.1 percent and 3.1 percent for 2024 due to continued high prices of food, utilities, and transport as well as more pronounced second-order effects on rent and restaurants.

Inflation is projected to remain above the two percent to four percent target until early fourth quarter this year. Currently, inflation stands at 8.7 percent for January. The BSP expects the rate to slow down to an average 7.7 percent in the first six months, before dropping more to 5.4 percent in the third quarter. By as early as October, they see inflation falling below four percent to an average of 3.8 percent in the fourth quarter.

“The risks to the inflation outlook now lean strongly toward the upside for both 2023 and 2024. The major upside risks to the inflation outlook are the potential impact of uncertainty in global food commodity prices, increased domestic prices of key food items facing supply constraints, additional transport fare increases due to elevated oil prices, and possible higher-than-expected wage adjustments in 2023. Meanwhile, the primary downside risk to the inflation outlook is the impact of a weaker-than-expected global recovery,” said the BSP.

The BSP’s primary monetary policy instrument is the interest rate on its RRP facility. To achieve its intended inflation target of two percent to four percent, the BSP has several policy tools to make this happen, such as increasing or decreasing banks’ reserve requirement ratios and its weekly auctions for the TDF and BSP bills.

Other options include adjusting the rediscount rate on loans extended to banking institutions on a short-term basis against eligible collateral of banks’ borrowers, and the outright sales and purchases of the BSP’s holdings of government securities.

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